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Testing for Trade-Induced Investment-Led Growth

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  • Richard E. Baldwin
  • Elena Seghezza

Abstract

Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.

Suggested Citation

  • Richard E. Baldwin & Elena Seghezza, 1996. "Testing for Trade-Induced Investment-Led Growth," NBER Working Papers 5416, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5416
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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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